Redefining the sector dynamics, industrial goods manufacturer General Electric Company GE inked a definitive agreement with Baker Hughes Incorporated BHI to merge its Oil & Gas business with the latter to form an industry leader with an unrivalled mix of service and equipment capabilities.
However, this multi-billion deal, which seeks to create a behemoth in the oil & gas industry with operations in over 120 countries and combined revenues of $32 billion, failed to lift investor sentiments. Share prices decreased marginally to close at $28.88 on Nov 1, 2016 on the subsequent day of the announcement of the deal.
The Deal
Under the terms of the agreement, GE Oil & Gas and Baker Hughes will form a new entity (the “New” Baker Hughes) using a partnership structure, pursuant to which both the parties will contribute their operating assets to the newly formed partnership. General Electric will own the majority stake of 62.5% in the new company, and the remainder will be held by the erstwhile Baker Hughes shareholders, who will also receive a special one-time cash dividend of $17.50 per share at closure. General Electric will contribute about $7.4 billion to the new partnership to fund the dividend.
The transaction is expected to close in mid-2017, subject to mandatory regulatory approvals and other closing conditions. The “New” Baker Hughes will have dual headquarters in Houston, Texas and London, U.K., along with nearly identical representation in the Board of Directors.
The Rationale
With a complimentary portfolio of operating assets and integrated offerings, the new entity will be able to better serve the existing customers of both the companies. While General Electric possess unique capabilities in fullstream oil and gas manufacturing and technology solutions spanning across subsea & drilling, rotating equipment, imaging and sensing, Baker Hughes has proven expertise in drilling & evaluation and completion & production services. The transaction will reportedly create the second largest player in the oilfield equipment and services industry.
Through effective utilization of combined resources, the synergistic deal is likely to yield $1.6 billion by 2020. The transaction is anticipated to be accretive to General Electric’s earnings by 4 cents per share by 2018 and 8 cents by 2020.
Hints of Re-Conglomeration
General Electric has been actively pursuing its massive restructuring initiatives in order to create a simpler and nimbler firm. From a classic conglomerate with diversified business interests in financial services, media, industrial and technology-based operations, the company is pruning its operating portfolio to focus on core manufacturing businesses with a digital edge. Since Apr 2015 till the end of Sep 2016, GE Capital inked sale agreements worth approximately $193 billion in ENI, of which it has already completed deals worth $173 billion.
However, the recent partnership with Baker Hughes portrays re-conglomeration efforts by General Electric to arrest the dwindling sales of its Oil & Gas business. During third-quarter 2016, Oil & Gas revenues declined 25% year over year to $2,964 million, due to macroeconomic headwinds and volatility in oil prices. Experts widely believed that GE Oil & Gas business lacked product breadth and was losing market share in a few key product lines, leading to increased risk of asset erosion. The strategic deal, therefore, fortifies the beleaguered business to ramp up its operations to fend off competition from rivals like Schlumberger Limited SLB and Halliburton Company HAL.
We remain impressed by the opportunistic deal and expect the transaction to be mutually beneficial for both the companies. General Electric currently carries a Zacks Rank #4 (Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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